Vacation Homes

Low mortgage rate not always best

It is always satisfying to get yourself a really low mortgage rate, knowing even a 0.5 percentage point reduction in your rate can mean substantial savings in interest payments over the lifetime of any deal. However, advisors urge clients to carefully examine the offer as some terms and conditions could, in the long term, prove to be more costly than a higher rate with flexible terms.

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, Postmedia News

It is always satisfying to get yourself a really low mortgage rate, knowing even a 0.5 percentage point reduction in your rate can mean substantial savings in interest payments over the lifetime of any deal.

However, advisors urge clients to carefully examine the offer as some terms and conditions could, in the long term, prove to be more costly than a higher rate with flexible terms.

"Some lenders advertise a really good rate but you're not allowed any pre-payments during the term," says John Filice, a mortgage broker with Invis in Toronto. The rate is suitable for a first-time buyer with a limited cash flow, he says, but not for someone who can make extra payments.

For clients who have the ability to make extra payments, Mr. Filice says it may make more sense to pay a slighter higher rate and increase the frequency of payments, rather than take longer to pay off a lower-rate mortgage with no pre-payment facility.

" You want to make sure that the mortgage is portable to another house," says Mike Missere, a mortgage broker with Mortgage Intelligence in Thunder Bay. He says taking one of today's low-rate deals with you when you move could save early repayment penalties for your existing mortgage, as well as higher interest costs on a future new deal, but cautions that you check how the early repayment penalty is calculated.

"There's two formulas, either three months' interest or the interest rate differential," Mr. Missere says. "Depending on your interest rate and how much time you have to maturity, those interest rate differentials can be substantial."

Mr. Filice says borrowers need to check what documentation a lender requires and when this material needs to be submitted. He says customers should check how long it will take to actually get the money from the lender.

"Some banks will need 30 days once a file is complete to fund a deal, whereas some lenders can do it in five days," Mr. Filice says. "If you're refinancing, or you need funds for a certain timeframe, that does affect it."

Mr. Filice says some lowrate offers can be short-lived.

"Some lenders will have a quick-close special and if it doesn't fund within 30 days, the rate will jump," he says. "Either have a backup plan or be sure you can meet [documentation and closing] requirements."

Again, for refinancing Mr. Filice says check conditions carefully.

"If you're doing a refinance to pay off some debts, do the lenders want you to pay off those debts up front?" Mr. Filice says. "Or will they just allow you to pay out the debts on your own?"

"A lot of people spend more time looking for a fridge or a stove than they do for the right mortgage," Mr. Missere says. "The right mortgage makes more sense. It's the largest expense they're going to have. They want something that can be managed properly to reduce costs over time. Interest rate is important, but so are all the features."

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It is always satisfying to get yourself a really low mortgage rate, knowing even a 0.5 percentage point reduction in your rate can mean substantial savings in interest payments over the lifetime of any deal. However, advisors urge clients to carefully examine the offer as some terms and conditions could, in the long term, prove to be more costly than a higher rate with flexible terms.

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